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I was honoured to be the guest speaker for the Worshipful Company of Information Technologists at their Quarterly Lunch yesterday. The lunch was held at the Tallow Chandlers' Halls in the City ...
... although the technologists are not candlestick makers, they know where to have a party.
Anyways, in the spirits of keeping my speeches for the record, here's what I said:
Master, wardens, ladies and gentlemen, thank you for inviting me here today.
And my theme is long-term investing versus the short-term.
SHORT SELLING AND HIGH FREQUENCY TRADING ARE THE MANTRA OF TODAY’S INVESTMENT MARKETS.
It's worth discussing in depth, but we don't have time today, so here's the basics of how short selling works.
You have stocks which I borrow for a fee.
I then sell your stocks at a price of let’s say £10 and, due to the markets seeing the stocks sell in larger numbers, the price falls.
When the price is low enough, I buy the stocks back at let’s say £5, making a £5 profit on each.
I then give you your stocks back and, as you’re there for the long term, we both win in the short term.
You get a fee, and I get a profit.
It's greedy, but it's legal.
THE QUESTION IS WHETHER THIS IS BAD OR, RATHER, IS GREED GOOD?
Short-termism and making a quick buck, is not an issue is it.
It’s just greed that drives this behaviour and, as in the words of Gordon Gecko in the film Wall Street:
“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save this company, but that other malfunctioning corporation called the USA.”
SURE, GREED IS GOOD … IT HAS DRIVEN US FORWARD FOR YEARS.
THINK ABOUT IT.
All progress throughout history has been driven by short-term greed, no better illustrated than by the immortal words of Orson Welles in the Third Man:
"In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love, they had five hundred years of democracy and peace, and what did they produce? The cuckoo clock."
Greed, like war, characterises humanity.
Greed is good.
Without greed, you would not have progress.
Without greed, there would have been no Renaissance.
Without greed, there would be no industrial revolution.
Without greed, there would be no British empire.
And without greed, there would be no information revolution.
And this is why we all focus upon the quick buck.
WHO, HERE, HAS NOT WANTED TO MAKE MONEY FROM THEIR HOUSE?
From their shareholdings?
From their investments?
You may say you invest and save for the long term, to pay off a mortgage and build a pension, but who here would not want to make a quick buck given the chance?
Who wishes they had invested in Microsoft when the shares were $1 … or Google … or Facebook?
And who here laments the fact that instead, they bought shares in Lotus … or Ask Jeeves … or Friendster?
We all want to make a buck and none of us is that bothered about the long-term.
That is because we are all driven by the same needs of instant gratification and instant need.
IT’S IN OUR NATURE.
Animals do not defer greed.
If you offer an animal unlimited food, they will eat until they can eat no more.
They have no patience as patience is a uniquely human characteristic.
No animal demonstrates patience like humanity, as it is part of how our brain is built.
WE CAN PROVE IT.
Before 50,000 B.C., very little happened.
The GDP of the planet stayed consistently low.
Then something changed.
In 50,000 B.C., Neanderthal man died out and homo sapiens took over.
What changed?
The Brain.
The pre-frontal cortex provides patience, whilst the limbic mid-brain around the cerebral cortex dominates with impatience.
Neanderthals had a short frontal lobe, which is why their forehead is angled, whilst their skull was larger at the rear to accommodate the cerebral cortex.
This is similar to most animals as the mid-brain dominates their behaviours.
As a result, animals are impatient by nature, and seek instant gratification to instant needs.
Then the homo sapien emerged.
The homo sapien's forehead is flatter and this change is due to the prefrontal cortex increasing in size to accommodate our ability to think rationally and, as part of this, to demonstrate patience.
For the first time, an animal demonstrated the deferment of short-term pleasure for long-term gain.
Hence, patience is a virtue that homo sapiens discovered and is what characterises mankind and civilisations.
It is the reason why productivity increased so rapidly from 50,000 B.C. onwards.
We learned to think rationally and store food for the winter, rather than eat it today.
We learned to build houses, rather than live in caves.
We learned to farm, rather than hunt.
All of these skills required patience.
AND THIS IS WHY LONG-TERMISM IS IMPORTANT.
It is the reason why the Egyptians built Pyramids and the Church built Cathedrals.
It doesn’t focus upon net present value, but focuses upon leaving something wonderful for future generations and protecting such investments for the long-term.
There are many examples of how long thinking works.
One such example is New College Oxford which, being British, was actually established in 1379 and isn’t new at all.
The College’s Great Hall has this fantastic arched ceiling with oak beams.
After five hundred years, the beams were rotting so badly they needed to be replaced.
So the Dean of the College asked the groundsmen if they knew of anywhere to source some similar beams?
“Oh yes”, the head groundsman said. “Five hundred years ago, when they built the college”, he told the Dean, “the founders planted a forest of oaks of the same wood as the one’s used in the ceiling just over there.”
In other words, they had had the foresight to realise that, at a point in the Long Future, the ceiling beams would need replacing so they planted trees for just such an occasion.
THAT’S LONG THINKING.
Another example is the Dutch Government, who spent €450 million building the Maeslant barrier to protect the reclaimed land across the Coast of the Netherlands.
€450 million on an event that may never happen makes sense ... because if it did, the cost could be, let’s say, €60 billion.
What could cost €60 billion?
The devastation and disaster caused by a major flood of the Dutch coast.
And this is also the cost of the sinking of the major American coastal city, New Orleans, in 2005.
Hurricane Katrina cost the USA over €60 billion.
If the USA had thought long, they would have spent the billion it would have cost to build the flood defences for the southern coastline, and saved themselves €60 billion.
THAT’S WHY LONG THINKING IS IMPORTANT, BUT WHO BOTHERS ABOUT LONG-TERMISM?
Who wants to invest in something that might pay off in a hundred, or a thousand or ten thousand years?
Well there are some people.
And they are called Long Finance.
Long Finance wants to protect this world by looking at net long-term value, rather than net present value.
AND WHY IS LONG THINKING IMPORTANT TODAY?
Some would say because our planet is screwed.
Others because it will be if we don’t change our ways.
And others would say we uniquely adapt, as demonstrated by carbon credits and clean biofuels to address climate change.
BUT CHANGING OUR WAYS IS NEVER EASY.
Especially as impatience is in our very nature and patience is something we’ve learned … and are still learning.
And, as we talk about short selling versus long finance, we will have a continual mismatch of needs and expectation.
For example, I heard a story the other day that reflects the long versus short debate well.
A banking friend of mine told me that his son came up to him the other night and asked: "Dad, how does capitalism work?"
His Dad says:
"Well son, let me try to explain it this way: I'm the breadwinner of the family, so let's call me the Capitalist.
Your Mum, she's the administrator of the money, so we'll call her the Government.
We're here to take care of your needs, so we'll call you The People.
Your nanny, who looks after you and your baby brother, we'll consider her to be the Worker.
And your baby brother, we'll call him the Future.
Now, think about that and see if that makes sense."
So the little boy goes off to bed thinking about what Dad had said.
Later that night, he hears his baby brother crying, so he gets up to check on him.
He finds that the baby has severely soiled his nappy so the little boy goes to his parents' room and finds his mother sound asleep.
Not wanting to wake her, he goes to the nanny's room. Finding the door locked, he peeks in the keyhole and sees his father in bed with the nanny.
He gives up and goes back to bed.
The next morning, the little boy says to his father, "Dad, I think I understand the concept of capitalism now."
The father says, "Good son, tell me in your own words what you think capitalism is all about."
The little boy replies, "Well, while the Capitalists are screwing the Workers, the Government is sound asleep, the People are being ignored and the Future is in deep shit."
ON WHICH NOTE, LET’S TALK ABOUT THE FUTURE.
In the future, banking, government, society and the world will be different.
It already is, as illustrated by the fact that SEVEN BILLION PEOPLE in this world now have access to wireless infrastructures through mobile devices.
The world is now connected P2P and C2C.
Forget B2B and B2C … today’s world is all about ‘me’ to ‘you’.
And what that means is that every single one of the seven billion people can be a communicator, developer, producer and entrepreneur.
So here’s to a planet where wealth generation through wireless technologies gives everyone the opportunity to be a millionaire.
But if you are to compete in that future planet, you need to think long as that gives you the ability to compete as illustrated by these wise words from Jeff Bezos, CEO of Amazon:
"If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue."
THERE’S THE KEY: THINKING LONG AND HAVING A VISION.
And how do you get that.
Well, there’s two ways to think about it.
First, think about it like a Chief Financial Officer (CFO).
And a CFO I knew once met the Devil.
The Devil said to the CFO: "I can make you richer, more successful and more famous than any other CFO alive. In fact, I can make you the greatest CFO that ever walked the planet."
"Great" says the CFO, "What do I have to do in return?"
The Devil smiles, "Well, of course you have to give me your soul," he says, "but you also have to give me the souls of your children, the souls of your children's children and, just for good measure, you have to give me the souls of all your descendants throughout eternity."
"Hmmmm," says the CFO, cautiously considering … "and what's the catch?"
Or you can think of it like the late, great Steve Jobs.
Steve Jobs has many quotable quotes, but I think this one sums up thinking strategically: “"Being the richest man in the cemetery doesn't matter to me … Going to bed at night saying we've done something wonderful … that's what matters."
So go do something wonderful and build something for the next millennia rather than the next minute.
Thank you.
Postscript
I’ve blogged a lot about the Long Now and Long Finance in the past. If you want more of this, just go visit The Long Blog about the Long Now for a full summary.
Also note that the sections of this speech about the brain is extracted from the speech of Andrew Haldane I summarised earlier this week. Not surprising as he was talking Long versus Short. A coincidence, as my theme was given to me by the Worshipful Company several months ago, but good timing nonetheless.
At this year's SIBOS, the cartoonist Hugh MacLeod appeared etching and sketching.
Hugh is a humourous guy who runs the website Gaping Void that gets over two million unique visitors monthly.
I was lucky enough to have Hugh produce a work of humour for the Financial Services Club and the Finanser blog so, here it is:
We love it. After all we do call the Club a drinking place for bankers lol and, as you can see, we've now added the cartoon as a badge emblem for the Blog.
Anyways, we're sure you'll see more of this and Hugh in the future and if you want some more now, here's more about Hugh:
Hugh MacLeod is a cartoonist, who makes his living mostly drawing“Cube Grenades” for clients and publishing fine art prints via the internet. His first book, “Ignore Everybody” is published by Portfolio, an imprint of Penguin.
Also known for his ideas about how “Web 2.0″ affects advertising and marketing, after a decade of working as an advertising copywriter, Hugh started blogging atgapingvoid.com in 2001. He first started off just publishing his cartoons, but as time wore on he started blogging about his other main interest i.e. marketing.
In 2004 he wrote “Ignore Everybody” and “The Hughtrain”, which both got widely read in the blogosphere, downloaded over million times in total.
In 2005 he scored his first major blog marketing success with EnglishCut.com, a blog he started with Savile Row tailor, Thomas Mahon. It tripled Thomas’ sales within six months.
Since mid-2006 Hugh has also been helping a small South African winery,Stormhoek “rise above the clutter” in the wine market by using Web 2.0 tools to get the word out. Sales have gone up fivefold since then, thanks to Hugh’s marketing efforts.
Since 2006 Hugh has been constantly engaged as a public speaker, giving talks in both Europe and the US, talking about Web 2.0 and the ramifications it has on business.
Hugh’s basic mantra about blog and Web 2.0 marketing is “It’s a good way to make things happen indirectly”, a point lost on many corporate types.
Last night was the occasion of the Sir John Gresham annual lecture.
This year it was held at the Four Seasons Hotel in Canary Wharf with the keynote speaker being Andrew Haldane, or Andy as is the preference, Executive Director for Financial Stability with the Bank of England.
Andy is speaking at the Financial Services Club in 2012, so I was particularly interested in his speech, as well as the fact that I’ve heard and read much about him in the past.
Andy’s theme for the night was short versus long-term investing, and whether short-termism is a good or bad thing.
This theme was based upon Gresham’s Law – bearing in mind this is the Sir John Gresham lecture – that bad money will drive out good. In today’s parlance, short money will drive out long.
But this is nothing new, Andy argued, as short-termism has been with us since time immemorial.
Just look at a few notable quotes from history:
“The untutored savage, like the child, is wholly occupied with the pleasures and troubles of the moment; the morrow is dimly felt; the limit of his horizon is but a few days off”, Jevons (1871)
“Like children who pick the plums out of their pudding to eat them at once”, Marshall (1890)
“It implies only that our telescopic faculty is defective, and that we, therefore, see future pleasures, as it were, on a diminished scale.” Pigou (1920)
It’s all about impatience versus patience and our inability to defer today’s pleasures until tomorrow.
That’s the nature of why we are short rather than long term.
But patience is a uniquely human characteristic.
No animal demonstrates patience like humanity, as it is part of how our brain is built with the pre-frontal cortex providing patience whilst the limbic mid-brain around the cerebral cortex dominates with impatience.
So what is this all about?
Well, from a million or so B.C. to around 50,000 B.C., very little happened.
The GDP of the planet stayed consistently low.
Then something changed.
In 50,000 B.C., Neanderthal man died out and homo sapiens took over.
What changed?
The Brain.
Neanderthals had a short frontal lobe, which is why their forehead is angled, whilst their skull was larger at the rear to accommodate the cerebral cortex.
This is similar to most animals, who are impatient therefore and seek instant gratification to instant needs.
Homo sapiens emerged, and their foreheads elongated as the frontal cortex increased in size.
Hence, patience is a virtue that homo sapiens discovered and is the reason why productivity increased so rapidly from 50,000 B.C. onwards.
The brain is still developing dynamically, and technology today is changing how our brain works.
For example, there was recently a study released that proves that internet search engines are changing the way our brains remember information, as readily available information online makes people easily forget facts since computers become their external memory.
Our attention span is shortening as a result, with jobs, relationships and attention all collapsing into shorter time cycles.
Football managers used to get four or more seasons to prove themselves; now they’re lucky if they last more than one.
Alex Ferguson may well have lost his job 25 years ago, if today’s climate of rapid churn had applied back then.
CEOs used to have a tenure of ten years or more; today, the average is under five.
And marriage is an institution that is lucky to survive till death doth you part.
This applies equally to shareholdings, where the average holding of shares today is months compared to decades forty years ago.
The result is the short money will drive out long, and this self-destructive behaviour is easily seen in evidence today.
For example, in a recent survey, 78% of CFOs said that they would rather sacrifice economic value for smooth quarterly earnings.
That means they would rather avoid investing in their firm’s future if it meant this quarter’s earnings would be consistent.
We see this in dividends.
Forty years ago, dividends were not always issued.
If the company was struggling or needed to invest, they would withhold dividends.
Not now.
Dividends are issued every quarter, regardless of how the firm is coping.
Maybe this reflects the pressures on stock prices and management who often have a stake in their firm’s performance due to share options.
Or maybe it’s just the pressure of the short-termists and the capital markets.
But myopic investing is not necessarily good for growth.
For example, using net present value discounting in a myopic view means that you can see negative returns on projects that would actually be delivering profits in a rational view.
As little as a 0.1 change in NPV can make the difference.
Equally, it shows itself in how firms operate their Research & Development (R&D) budgets.
A survey of the Top 1000 UK corporations found that only 1.39% of revenues were invested in R&D in listed companies compared to an average 2.63% for unlisted companies; similarly only 1.44% of revenues were placed into R&D for UK owned companies compared to 2.7% for UK based companies owned by overseas corporations.
Short-termism is rife in our businesses and it constrains long-term growth and value.
A similar survey was performed across 100,000 US companies by Asker and company found that private firms are over twice as likely to invest in the long-term value of their firms when compared with public companies, and over three times as likely to consider such investments.
So Andy’s presentation kind of summarised the nature of short term capitalism, or quarterly capitalism as McKinsey call it, and he concluded with a few ideas as to how to rectify such short-termism.
These included bringing in some longer term performance metrics for corporations and investors based upon their rate of portfolio churn, R&D spend, etc; linking shareholder rights to the length of a shareholder’s share holding; linking capital gains tax to length of the holding, such that you pay lower taxes for longer holdings; and more.
All good ideas and a view that, at the end of the day, we need to stop the short-termists “picking the plums from the pudding” or allowing the “untutored savage” to ravage the markets.
Andy was then asked a few questions form the floor.
I was amused to hear him talk about lessons from the crisis and that we thought we needed “more regulation and this time it will be better, and more regulators but this time they will be smarter. That kind of didn’t work. We must look instead at the fundamentals of the financial markets structure and address core issues such as the fact that there are some very big banks and many small banks but a missing middle. There aren’t enough mid-size banks out there.”
He did say that regulators are getting some things right now: they recognise the importance and implications of systemically important financial insitutions (SIFIs) and the capital requirements for large banks that go with this. On the downside however, regulators are still grappling with births and deaths - making it easier to get new banks born and unworkable banks removed.
He also has a dramatic turn of phrase.
Take this one for example: “almost all dinner party conversations I go to about the post financial crisis, I go in depressed and leave suicidal.”
But, on regulations and monetary policy, he concluded that “the game is to slow down the deleveraging of the global markets and that is what we have done through zero percent interest rates and quantitative easing.”
On that note, I think he’s pretty much spot on and look forward to meeting and hosting Andy at the Financial Services Club next year.
For a more expansive version of this speech, a similar presentation was given by Andy in May 2011, to the 29th Société Universitaire Européene de Recherches Financières Colloquium: New Paradigms in Money and Finance? in Brussels.
Our biggest stories of the week are ...
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I’m no expert on such matters, but a friend of mine was talking about different tools for different times and how they use certain technologies for different services. In particular their interests are data visualisation techniques and how these can...
Seeing the wood for the tree branches (again)
We had a discussion last night about branchless banking, with two retail bank leaders telling me I was wrong about the idea. The argument was not actually about the concept of branchless banking, but less branch banking. Even so, these...
Talking about the St Paul’s protesters yesterday, you do wonder if they maybe have a good point or two to make. Like their American counterparts, I’m sure they do but unfortunately it’s all a bit loose and airy-fairy, with a...
Jim O'Neill on the BRICs - the next decade
Just tweeted to our friends in the #OccupyLSE group – that’s Occupy the London Stock Exchange (LSE) for those who are not aware of the protest outside the LSE at St Paul’s – that I attended a meeting at the...
The major general news stories of the week include ...
Britain prepares for eurozone 'armageddon' - The Independent
Deep in the Treasury’s recently-refurbished offices, the Government’s finest economic brains are having to think the unthinkable.
UK banks face huge losses on Italian debt - The Telegraph
British banks could be among the hardest hit by the Eurozone financial crisis because they are exposed to tens of billions of pounds of Italian debt.
David Cameron set to veto 'unacceptable' RBS bonuses - The Telegraph
David Cameron has indicated he will block "unacceptable" bonuses that Royal Bank of Scotland is set to pay bankers this Christmas.
Crunching the numbers on HSBC job losses - The Telegraph
Bi-monthly satirical magazine Private Eye runs a regular feature titled 'Number Crunching' where it contrasts a set of figures to illustrate a bigger point.
Nordic Banks Beat European Rivals - Business Week
Nordic banks, which steered clear of the subprime meltdown and the worst of Europe’s debt crisis, are proving that it pays to keep business local as they outperform bigger rivals and increase their corporate lending.
Is culture important in banking? - The Telegraph
Does it really matter if anyone at a bank actually likes the people at the top running the business? Should we care if senior executives hold a barely disguised contempt for those that are charged with determining the strategy they are then required to implement?
Tobin Tax is a tax on pensioners that will cost 1m jobs, says Chancellor George Osborne - The Telegraph
George Osborne has condemned plans for a European Union levy on financial transactions as a 'big tax on pensioners' that will lead to 995,000 job losses and not cost bankers a penny.
I've seen the future for Royal Bank of Scotland and it's called NatWest - The Telegraph
A month ago I asked: "Will someone please explain the point of the Royal Bank of Scotland?"
EU: we'll make UK cut bank bonuses - The Independent
The European Commission is considering tough new proposals to curb the pay and bonuses that banks can hand out to staff working across the European Union.
British banks facing claims risk in Saudi fraud case - The Telegraph
HSBC and Standard Chartered could be dragged into a multi-billion dollar dispute between warring Saudi factions after the banks were forced to hand over potentially incriminating documents.
If you like the Finanser, check out the books of the blog: the new Complete Banker Series
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I’ve been loathe to talk too much lately about the Eurozone as it’s just too darned depressing.
What with Greece slipping and sliding away, Italy bunga’d out and now France being challenged, it’s just a crazy, crazy moment in history.
There’s even a discussion of the Eurozone disbanding, although officials deny this.
However, in my spirit of fun, I was prompted to find a bunch of European jokes after reading about Silvio Berlusconi:
He became notorious for off-colour jokes, including likening a German member of the European Parliament to a Nazi, accusing communists of boiling children and using them as fertilizer and calling President Barack Obama "suntanned".
While the 75-year-old openly flirted with female heads of state, he showed little talent for diplomacy and left German Chancellor Angela Merkel waiting at a NATO summit in 2009 while he finished a phone-call in front of her.
In a telephone intercept leaked to Italian press earlier this year he described Italy as "a shitty country" and said he could not wait to leave.
His quip to supporters that he should change his party's name to "Go Pussy!" to boost its popularity also fell flat and brought widespread condemnation.
Therefore, keeping up the levity, here are a few more Euro jokes for a frazzled French Friday …
How the European Union works
How the EU works: In Germany, they make the rules, in Britain, they obey the rules, in France, they bend the rules, in Spain, they break the rules, and in Italy they have no rules at all.
Working in Brussels
On a visit to the Headquarters of the European Commission, a visitor noticed that there was a big yellow line painted down the middle of the corridor. "What's that for?" he asked his host. His host replied: "Oh, that's to keep the staff coming in late from colliding with the ones who are leaving early."
European Union
An Englishman, Frenchman, German, Belgian, Italian and Spaniard walk into a pub... and the landlord says: “Is this some kind of joke?”
European Disunity
An Irishman, Greek, Portuguese, Italian and Spaniard walk into a pub... the German pays.
Don’t take the peace
The EU has decided that the British colloquialism “to spend a penny” is no longer correct and must be replaced by the new expression: “to Euronate”.
The European Parliament has decided to change the design of the euro when noticing that the first one was a bit boring and sad. The new design is a stronger and more aggressive one which will make people eager to consume ...
A prize was to be awarded for the first person to discover a horse with black and white stripes like a zebra.
A German, a Frenchman, an Englishman and a Spaniard participated hoping to win the prize of €1 million.
The German decided to spend weeks in the National library researching into horses with black and white stripes. The Englishman went straight to a shop in Piccadilly which specialises in hunting gear, bought all the equipment necessary and set off for Africa in his quest for this strange creature. The Frenchman bought himself a horse and painted it black and white . The Spaniard went to the best restaurant he knew in Madrid, ordered an expensive meal for himself with a fine bottle of wine; after the meal he ordered an expensive Havana cigar and a Napoleon brandy, sat in a luxurious arm-chair in the hotel and began to consider what he would do with the 1,000,000 euros once he had found this remarkable horse with black and whte stripes.
The European Commission has just announced an agreement whereby English will be the official language of the EU rather than German which was the other possibility.
As part of the negotiations, Her Majesty's Government conceded that English spelling had some room for improvement and has accepted a five year phase-in plan that would be known as "Euro-English".
In the first year, "s" will replace the soft "c". Sertainly, this will make the sivil servants jump with joy. The hard "c" will be dropped in favour of the "k". This should klear up konfusion and keyboards kan have 1 less letter.
There will be growing publik enthusiasm in the sekond year, when the troublesome "ph" will be replaced with "f". This will make words like "fotograf" 20% shorter.
In the 3rd year, publik akseptanse of the new spelling kan be ekspekted to reach the stage where more komplikated changes are possible. Governments will enkorage the removal of double letters, which have always ben a deterent to akurate speling. Also, al wil agre that the horible mes of the silent "e"s in the language is disgraseful, and they should go away.
By the fourth year, peopl wil be reseptiv to steps such as replasing "th" with "z" and "w" with "v". During ze fifz year, ze unesesary "o" kan be dropd from vords kontaining "ou" and similar changes vud of kors be aplid to ozer kombinations of leters.
After zis fifz yer, ve vil hav a reli sensibl riten styl. Zer vil be no mor trubl or difikultis and evrivun vil find it ezi to understand ech ozer. Ze drem vil finali kum tru! And zen world!
And one of the oldest jokes …
In Heaven: the cooks are French, the policemen are English, the mechanics are German, the lovers are Italian and the bankers are Swiss.
In Hell: the cooks are English, the policemen are German, the mechanics are French, the lovers are Swiss and the bankers are Italian.
Thanks to the BBC for the unaccredited jokes above.
This is Part Two of a European Joke series. Part One can be found here.
I’m no expert on such matters, but a friend of mine was talking about different tools for different times and how they use certain technologies for different services.
In particular their interests are data visualisation techniques and how these can identify fraudulent activity or improve investment strategies.
He equated it to the Donald Rumsfeld knowns and unknowns, with basic relational databases dealing with known knowns, data mining with known unknowns, complex events processing with unknown knowns and visualisation with unknown unknowns.
It moves a little beyond my ability with technology to really get this, except that there’s this constant stream of data these days, often referred to as 'big data'.
Data is everywhere, streaming across social networks, banking systems, commercial ecosystems and government intelligence services.
All of this data – gigabytes, petabytes and exabytes of it – is growing daily and exponentially.
There’s too much data.
With all of this data something or someone needs to be able to crunch through it, analyse it and see patterns within it.
Cloud computing helps, as it allows an organisation to sift through terabytes of data in seconds without the internal processing power required to do this, but it’s more than just processing power.
It’s the intelligence to discover.
And that’s why this discussion helped as you can apply massively parallel processing, virtualisation and grid to this tsunami of data, but without a map to see what’s important and what is not, it’s pretty worthless.
So here’s a simple map (doubleclick the image for larger version):
Be interested to see if folks agree whether this covers the bases or not.
We had a discussion last night about branchless banking, with two retail bank leaders telling me I was wrong about the idea.
The argument was not actually about the concept of branchless banking, but less branch banking. Even so, these retail bankers feel adamantly that the average human being wants a branch to bank.
I argued that mobile, internet, call centres and such like would eradicate the need for most branches.
They disagreed.
I said that the idea of walking into a branch and queuing for a transaction was ridiculous in the 21st century.
They disagreed.
I argued that a teller who is paid under $20,000 asking me if I wanted mortgage advice was not something I would even contemplate discussing.
They disagreed.
I argued that the cost of having transaction centres was an unsustainable overhead when far more efficient systems were in play.
They disagreed.
Their core argument is that the average customer in most countries wants to touch someone, talk with someone, visit somewhere and be with people.
They like branches, branch people, talking with people about money and being assured they are doing the right thing.
They argued that the average person is afraid of money; they don’t like thinking about it; they want someone to tell them they are doing the right thing and to give them support and help.
They argued that I am not the atypical customer; that I am far more educated and assured in my dealings with money and technology; that I am not the typical person in a branch and that branches are there to provide advice and support.
Interestingly, there was an outspoken discussion about how banks got it so wrong in the 2000s, that branches were referred to as ‘stores’, that banks became retailers and that this was wrong.
Banks are not retailers, they are advisers.
They shouldn’t sell credit, but they should provide credit where credit is due.
If loans and mortgages are affordable they should be available to that customer, but they shouldn’t be pushed like a drug on every person whether they can afford such credit or not.
The latter part we all agreed with; the former we didn’t.
I disagree that every human wants human contact and service for banking.
That human contact and service for banking should be available is important, but not on every high street corner.
That most people are happy to use technology for self-serving and don’t need to go to a human for transaction processing.
This last piece was the most debatable point of all for me, as the retail bankers argued that technology can never replace human service for more complex processing.
Like the idea of doing investment services on an ATM, it just won’t work.
That last comment is where these guys shot themselves in the foot.
My argument is nothing to do with mixing transactions with advice; self-service with service; administration with sales.
Transactions and administration is where self-service is key.
Customers – whether educated or not – will perform the majority of their transactions and administration through self-service in the near future.
Like the ATM got rid of cash dispensing tellers, the mobile internet will get rid of the transactional branch.
That leaves advice and sales, where service with humans is required.
Complex products like mortgages and investment services will still be serviced by humans in branches.
Just, as I’ve argued for a long time, the non-transactional sales branch of the future will demand far less of a footprint than today’s transactional administration branch.
That’s the point.
The future branch will be limited in number - about a tenth of today's number - but unlimited in comfort, branding, service and advice.
And it will avoid having humans employed to do administration of customer's transactions.
Will they ever get it?
Just tweeted to our friends in the #OccupyLSE group – that’s Occupy the London Stock Exchange (LSE) for those who are not aware of the protest outside the LSE at St Paul’s – that I attended a meeting at the London Stock Exchange this morning.
Yes, I occupied the LSE!
Well, just for an hour in order to hear the thoughts of one Jim O’Neill, Chairman of Goldman Sachs Asset Management.
Jim is the man who coined the term BRICs for the growth countries of Brazil, Russia, India and China ten years ago (his paper was published in November 2001).
Since then everyone has taken the success story of China as read, although it has also been noted that the Brazil, Russia and India growth story also came true.
Now, ten years later, Jim was asked the question by the LSE: “Do BRIC countries still need the West for growth or is the reverse now true?”, and this was the theme of his presentation.
Here’s my spin on his talk (this is not a direct transcription therefore):
The question “Do BRIC countries still need the West for growth or is the reverse now true?”, couldn’t be more apt after the G20 meeting in Cannes last week. In fact, I would claim that this is the most important question facing global economies and leaders today.
And my answer is yes, the reverse is true.
The West has been the most challenged since 2008 as their deleveraging crisis has been with them ever since, and the BRICs are an ever increasing part of the solution.
That being said, the BRICs are living in the same planet as the rest of us and cannot let the West completely implode. For example, as we watch the troubling worlds of Greece and increasingly Italy, the BRICs are seeing more and more impact.
This is especially key for London, in its role in global finance, and is illustrated by the interesting events taking place a few yards away outside St Paul’s Cathedral (where the occupy LSE movement is demonstrating), which means it is very important that all of us involved in business and finance get a bit more objective about the issues being discussed in public forum these days.
Over the last decade the nominal increase in GDP amongst the BRICs has been greater than any other group of countries, apart from the G7.
This is difficult for people of my generation to see or accept, because it is new, although younger people get it far more easily.
Maybe this is because older people find it hard to adapt or change.
During the last decade, the GDP of G7 increased by $11 trillion.
Meanwhile, the Growth8 as I call them – the BRICs plus Indonesia, Vietnam, Mexico and Turkey – increased by a similar amount.
These countries are therefore so economically important that it’s rather sad and stupid that people still call these countries “emerging markets” when they have now emerged, and are contributing so much to growth and global markets. We should call them something else, which is why I choose to call them the Growth8, as opposed to other countries which are emerging markets.
BRICs represent 80% of the Growth8’s $11 trillion growth in the last decade.
The ‘C’ in particular – China – has seen its GDP increase faster than the USA in the last decade.
Another example is Brazil, which has seen GDP increase faster than Germany, Japan and the UK.
From 2010 to 2019, the Growth8 will again rise faster, with China still leading the way.
BRICs will see GDP growth of over $12 trillion of the $16 trillion rise in the Growth8, with China contributing around $8 trillion, or half of that GDP growth. This assumes an 8% average growth rate in their economy, so it assumes China’s growth will slow down.
However, if you look at the figures, the USA will only grow about $3 trillion in GDP by comparison, and Euroland by under $2 trillion.
In these figures, you would need a magnifying glass to see where Greece would sit in the global economy. It’s not big enough to matter.
For example, China will grow by the equivalent of three Greece’s this year – it creates a new Greece GDP size every four months.
Unfortunately that is not the case with Italy.
Looking to the future, the global share of GDP in 2020 will be 41% for the G7; and 35% for the Growth8. Of these, 27% of global GDP will be with the BRICs; 19% with the USA; 17% for China; and 16% for the whole of Euroland!
So during the next decade, the BRICs will be bigger than the USA.
This is important change, as the G20 and IMF are already changing their thinking about the BRICs.
For example, the IMF said at last week’s G20 meeting that it is going to review its Special Drawing Rights (SDR) basket of currencies before 2015, when it was next scheduled for review.
This implies that the Remnimbi (RMB) will be brought into the SDR basket before 2015 because China has moved far closer to full convertibility of their currency sooner than expected, which is incredibly important for everyone in finance, whether you invest in China or not.
This means that debt or equity issued in Chinese RMB becomes normal, which is infinitely more important than what’s going on in terms of Greek and European politics.
For example, when we berate others about their fiscal affairs we have to be careful as, when you look at the budget deficits and government debt, it is clear that this not a sovereign debt crisis.
The gross government debt, as a percentage of GDP, in particularly high in the UK (85%), USA (100%) and Japan (233%) are far worse than in the Eurozone, but their governments still have highly rated sovereign debt.
So the Eurozone issue is more a question of revealing the issue of the weakness of the European Economic & Monetary Union (EMU), rather than a question of sovereign debt.
And if you look at debt in the Growth8, the gross government debt as a percentage of GDP is under 25% for many.
This is why these economies are so key to the future and is illustrated by retail sales.
Retail sales since 2007 have dipped significantly in advanced economies but, in growth and emerging markets, are going up rapidly.
This is why German exports in the last four years have seen the biggest rise in sales to China, India and Russia. By 2012, Germany will be exporting more to China than their neighbour France, which is a real shock.
This demonstrates why the BRICs are now independent of the West and the West needs them far more than they need us.
But the BRICs are not some homogenous area or singular market.
Two are democracies and two are not, and their wealth is very different. Brazil and Russia average around $15,000 a head; China $5,000; whilst India is under $2,000; so they are not similar in terms of wealth or politics. Equally, they differ in content with two commodity producers and two importers, so they are not a region together.
The fact that they now meet as a group annually however is a symbolic move to Western leaders for change in economic governance, and to have these guys at the centre of it.
For example, the G20 is way too big and ugly, so we need a new G7 or G8, of which the BRICs and China will form a key part. For the UK and Canada that’s tough as, in terms of their size of GDP, it makes you wonder what they’re doing there.
The real topic now is what’s happening to Chinese inflation.
It should get under 4% next year, which will be massively important as it will stop China’s tightening of monetary policy and will help the global economy as a result.
We should also note that 2020-2029 might be India’s decade.
China’s demographics will create a turndown and growing anywhere near 10% per annum will be tough a decade from now.
India has great demographics however, with India’s working population increasing by the size of the total USA population in a decade.
Finally, political instabilities are a factor in this outlook.
We have a Goldman Sachs Growth Environment Score (GES) that looks at 13 variables related to the sustainability of growth and productivity, and India scores the lowest of the BRICs on this score.
So when people ask me if I was mistaken about Russia being in this list, I respond by saying I’d take the ‘I’ out of BRICs before the ‘R’.
India is challenged in terms of sustainable growth due to government finances and the lack of a credible framework for economic policy. They also have many other issues of corruption and indecisiveness, which means that they can conceptually be a leader by 2020 or after only if they address these challenges first.
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